Homebuilding companies are significantly increasing their revolving credit lines in order to sustain big year-on-year gains. Most recently, M/I Homes increased its credit facility from $315 million to $500 million, putting in an accordion feature that can increase the line to $750 million. "It is our desire to have growth in the next years in the 15% range and this should help us achieve our plan," said Phil Creek, cfo of the homebuilding company.
M/I Homes is following competitors such as luxury-homebuilderToll Brothers, M.D.C. Holdings and WCI Communities. Toll Brothers increased the capacity on its revolver from $575 million to $1.05 billion with an accordion feature in place to take it to $1.2 billion. "Management foresaw the need to increase the size of the facility to support the 20% average growth rate the company has attained since going public in 1996," said Frederick Cooper, senior v.p. finance at Toll (LMW, 7/26). WCI replaced its $405 million bank facility with a $600 million revolver and M.D.C. grew its $600 million to $700 million to support a projected 15% per-year growth strategy.
Craig Kucera, a senior analyst with Friedman,Billings,Ramsey & Co., commenting on Toll Brothers and MDC, said it is very common for these companies to expand through debt issuance. "They have not wanted to or needed to use equity issuance as they trade at relatively low earnings multiples and spin off so much cash flow." These companies though are constantly on the lookout to acquire land and need to put in an option or buy the land outright and then they will build and receive cashflow, he noted. "They want the dry powder to take advantages of any possible downturn," he said, adding they have pretty low leverage and so it makes sense to expand lines of credit.
J.P. Morgan is the lead arranger of the M/I Homes, Toll Brothers and M.D.C. lines-though only after inheriting the M.D.C. position through the Bank One merger. "They've been our lead bank for years," M/I Homes' Creek noted. "They're one of the leading lenders to the homebuilding industry and we've had a very excellent long-term relationship with them." Bank of America leads WCI's revolver.
U.S. Bank is syndication agent on the M/I Homes credit. B of A, The Huntington National Bank, KeyBank and Wachovia Securities are documentation agents. Guaranty Bank, National City Bank and SunTrust Bank are co-agents. The interest rate is based on a grid tied to ratings and the spread ranges from LIBOR plus 1-2%.